Feed-in tariffs – diffusion, design consideration and implementation in developing countries

Leonardo Webinar 12 January 2012

Dr. des. David Jacobs

Director Renewable Energy, IFOK GmbH

Course on Regulation and Sustainable Energy in Developing Countries – Session 3

www.leonardo-energy.org/course-regulation-and-sustainable-energy-developing-countries

Countries with renewable energy targets

Countries without targets

Countries with targets

From 45 in 2005 to 85 in 2010

3

FIT Countries 1995

Countries with state FIT policy

Countries with national FIT policy

Source: REN21, Renewables 2010 Global Status Report

4

FIT Countries 2000

Countries with state FIT policy

Countries with national FIT policy

Source: REN21, Renewables 2010 Global Status Report

5

FIT Countries 2010

Countries with state FIT policy

Countries with national FIT policy

Source: REN21, Renewables 2010 Global Status Report

World-wide installed capacity by incentive type (%)

Source: Bloomberg New Energy Finance

Wind Solar

Feed-in tariff64%

Tax incentive

23%

Trade & quota

9%

Market based

3%

Tendering1%

194GWFeed-in

tariff87%

Tax incentive

6%

Market based/off

-grid7%

43GW

Countries with FiTs

• 23 of 27 EU countries have FITs

• Feed-in tariffs in the EU have triggered considerable share of investment:

• 100% PV

• 86% wind

• 68% biomass

FITs in Europe

Source: Klein et al. 2010

Basic feed-in tariff design

• Purchase obligation

• “Independent” from power demand

• Fixed tariff payment based on the actual power generation costs

• Price setting will be discussed in session 4

• Long duration of tariff payment

Tariff payment duration

• Formerly: short periods (logic of conventional electricity sector)

• Nowadays: long payment durations (usually 15-25 years ~ lifetime of power plant)

• Necessary because of special investment structure

Eligible RE Sources/Technology

• Definition of eligible producers (technologies?) • Assessment of resource availability• Start with a handful of technologies, for instance:

Wind Biomass Small hydropower Solar PV

Plant size (maximum?)

Territory (offshore?)

Eligible RE Sources/Technology

Assessment of other resource needed!

Wind offshore? Tidal? Geothermal?

Number of eligible technologies

Source: Jacobs 2012

More “advanced” FIT design

• Advanced feed-in tariff design options are primarily for countries who have already supported renewable electricity technologies for a number of years

• Advanced FIT design is taken into account by more and more developing countries

• Objectives:

• Reduce windfall profits through differentiated tariffs

• Facilitate system integration

Pro and cons of tariff differentiation

• Advantages of tariff differentiation:

• Avoid windfall profits;

• efficiency of system can be increased,

• Additional costs for final consumer can be limited

• Disadvantages of tariff differentiation:

• High degree of complexity (reduced transparency)

• Overall efficiency might be reduced (e.g. better to construct two small plant)

→ Increase complexity over time (e.g. Germany: 1990: 4§; 2000: 13§; 2004: 22§; 2009: 65§)

Technology specific support

• Technology specific support to avoid windfall profits for producers of mature technologies

• Size specific support

• Location specific support Cost

Quantity

C

B

A

WP

MP

PFITA

PFITB

PFITC

Source: Jacobs 2005

Source: David Jacobs

Number of tariffs

Source: Jacobs 2012

Size specific tariff payment

Size specific tariffs

• Tariff differentiation according to size

• Economies of scale

• Market entrance for small producers

• According to typical installation sizes, e.g.

0 kW < Tariff/Price ≤ 30 kW30 kW < Tariff/Price ≤ 100 kW100 kW < Tariff/Price < 2 MW2 MW and above

Location specific tariff payment

Location specific tariffs

• Mostly applied for wind energy (Germany and France)

• Reduce accumulation of wind power plants in coastal areas (increases public acceptance); visual impact

• Location specific tariffs in Germany depend on wind speed at a given location (measured during the first 10 years of operation)

• First 10 years: flat rate

• Final 5 years: depending on “quality” of site

Location specific tariffs - Germany

Source: Klein et al. 2008

Location specific tariffs - Germany

Source: Klein et al. 2008

Location specific tariffs - Germany

Location specific tariffs

• New French FIT for solar also includes location specific tariffs

Source: http://re.jrc.ec.europa.eu/pvgis/countries/europe.htm

Tariff degression

Tariff degression

• Tariff degression (automatic, annual reduction); because of technological learning, economies of scale, rationalization, innovation pressure

• Effects only new capacity, i.e. tariff for “old” plants remains stable over long period of time

• Most countries only use it for solar PV (Italy, Spain)

Source: Klein et al. 2008

Tariff evolution solar PV in Germany

Source: Fulton et al. 2011

110 110 139

670951 843

1,271

1,809

3,806

7,407

0.510.48

0.46

0.620.60

0.56

0.53 0.52

0.43

0.39

0.510.48

0.46 0.460.43

0.41

0.38

0.35

0.32

0.24

0

1000

2000

3000

4000

5000

6000

7000

8000

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Added MWUpper BoundLower Bound

Tariff degression

• Tariff degression (automatic, annual reduction); because of technological learning, economies of scale, rationalization, innovation pressure

Source: MBIPV 2010

Tariff degression - Germany

• Germany implemented tariff degression for all technologies

• Tariff degression rates in Germany (2009)

Renewable energy technology Annual degression rate

Hydropower (more than 5 MW) 1 percent

Landfill gas 1.5 percent

Sewage treatment gas 1.5 percent

Mine gas 1.5 percent

Biomass 1 percent

Geothermal 1 percent

Wind power offshore 5 percent (from 2015 onwards)

Wind power onshore 1 percent

Solar PV 8-10 percent

Inflation indexation

Inflation indexation

• Feed-in tariff schemes guarantee tariff payment for a long period of time (15-25 years)

• Indexation applies to existing and new power plants!

• Full or partial indexation (Spain)

• Indexation to other economic indicators (France: cost of labor)

Inflation indexation

• Some European countries do not explicitly index tariffs (e.g. Germany)

• However, these countries have relatively modest and predictable price increased which can be taken into account when calculating feed-in tariffs

• In the case of countries with high inflation rated, tariff payment for existing plants should be inflation indexed

Demand oriented tariff payment

Demand-oriented tariff payment

• Higher tariffs during peak demand

• Lower tariff during off-peak periods

• Should only apply to “non-fluctuating” technologies (e.g. not wind and solar)

• Differentiation: day or time of year

Demand-oriented tariff payment

Source: Optres Final report 2007

Time-differentiated tariffs – hydro, France

Single-component tariffNo differentiation 6.07 €cent/kWh

Two-component tariff Summer 8.38 €cent/kWh

Winter 4.43 €cent/kWh

Four-component tariff Winter, normal demand 10.19 €cent/kWh

Winter, off-peak demand 5.95 €cent/kWh

Summer, normal demand 4.55 €cent/kWh

Summer, off-peak demand 4.25 €cent/kWh

Five-component tariff Winter, peak demand 17.72 €cent/kWh

Winter, normal demand 8.92 €cent/kWh

Winter, off-peak demand 5.95 €cent/kWh

Summer, normal demand 4.55 €cent/kWh

Summer, off-peak demand 4.25 €cent/kWh

Source: Author based on J.O. (2007a)

Assessment report

Assessment report and amendments

• Frequently review the FIT scheme and amend it, if necessary

• Germany and Spain: Review every 3 or 4 years

• New FIT countries: 1 or 2 years after first implementation, from there on every four years

Source: Meister Consultants Group, DBCCA Analysis, 2011.

Assessment report and amendments

• Assessment report should include:

• analysis of growth rates and average production costs of the eligible

technologies

• progress towards the achievement of targets

• economic, social and environmental benefits of the law (such as the

amount of investment and export trade, the number of jobs created and

the amount of carbon dioxide emissions avoided)

• additional costs for the consumer

Source: David Jacobs

Conclusion

Advantages of Feed-in tariffs

High level of investment security

New actors are entering the power market (competition)

PV price reduction and innovation triggered by degressive feed-in tariffs

> Investments are not postponed

Allows for technology specific support

Source: David Jacobs

Disadvantages of Feed-in tariffs

„uncontrolled“ market growth in case of tariffs that are too high (flexible degression)

The costs are growing continuously until the payment period of thefirst plants ends

Difficulty to anticipate technological development (progress reportsand monitoring necessary)

Source: David Jacobs

Preview of session 4 – Case studies on feed-in tariff implementation

More detailed case studies from developed and developingcountries (implementation steps, effectiveness and efficiency, critical path issues, etc).

Assessment of costs related to feed-in tariff mechanisms and design for cost control

Assessment of tariff calculation methodologies (how to get the tarifflevel right)

Further reading

Mendonça, M., Jacobs, D.; Sovacool, B. 2009b. Powering the green economy – The feed-in tariff handbook. Earthscan: London. http://www.earthscan.co.uk/?tabid=92822

Klein, A., Pfluger, B., Held, A., Ragwitz, M., Resch, G., Faber, T. 2008. Evaluation of different feed-in tariffdesign options – Best practise paper for the international Feed-in Cooperation, Second edition, October 2008. Available from http://www.feed-in-cooperation.org/images/files/best_practice_paper_2nd_edition_final.pdf

Couture, T., Cory, K., Kreycik, C., Williams, E., 2010. Policymakers’ Guide to Feed-in Tariff Policy Design. NREL, Technical Report, July 2010. Golden (CO): National Renewable Energy Laboratory. http://www.nrel.gov/docs/fy10osti/44849.pdf

Further reading

DB Climate Change Advisors 2009. Paying for renewable energy: TLC at the right price - Achieving scalethrough efficient policy design. New York, NY: The Deutsche Bank Group. http://www.dbcca.com/dbcca/EN/investment_research.jsp

EU Commission 2008a.The support of electricity from renewable energy sources, Commission staff working document, accompanying document to the proposal for directive of the European Parliament and of the Council on the promotion of the use energy from renewable sources, SEC(2008) 57, 23 January 2008, Brussels. http://ec.europa.eu/energy/climate_actions/doc/2008_res_working_document_en.pdf

Jacobs, D. and Kiene A. 2009. Renewable energy policies for sustainable African development, World Future Council, April 2009. http://www.worldfuturecouncil.org/fileadmin/user_upload/PDF/World_Future_Council_Renewable_Energy_Policy_Africa_June09.pdf

Thank you for your attention!!!

Dr. des. David Jacobs I Director Renewable Energy IFOK GmbH

Reinhardtstraße 58

10117 Berlin

Tel.: +49 30 536077-27

E-Mail: david.jacobs@ifok.de

www.ifok.de

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